In process costing system, a large number of homogenous products passed through several production departments where each department is responsible for one or more operations that bring a product one step closer to completion. In each department, materials, labor and overhead inputs may be needed and upon completion of a particular process, the partially completed goods are transferred to another process.
SIMILARITIES AND DIFFERENCES OF JOB ORDER AND PROCESS COSTING SYSTEM
The cost flows for a process cost system are basically similar to those of a job order costing system, both job order and a process cost system track the same three manufacturing cost elements, the materials, labor and overhead. In both costing systems, all raw materials received from suppliers are debited to Raw Materials Inventory account, all factory labor is debited to Factory Payroll and all overhead incurred are debited to Manufacturing Overhead Account. The three cost elements are then assigned to the same accounts in both costing systems – WIP Inventory, FG Inventory and COGS.
The major differences between a job order and process cost system are summarized below:
FeaturesJob Order Cost SystemProcess Cost System
a.) WIP Accounts* One for multiple jobs* One for each process
b.) Documents Used* Job cost sheets* Cost of Production Reports
c.) Determination of Total
Manufacturing Cost* Each job* Each Period
d.) Unit Cost Computation* Cost of each job / units* Total Manufacturing costs /
produced for the jobunits produced during the period
PROCESS COST FLOW
All raw materials are debited to Raw Materials Inventory when the materials are purchased. When materials are issued to production departments, the entry is:
Raw Materials InventoryXXX
Materials may be issued to production at different stages. It may be added to production at the beginning of the process, during the process or at the end of the process. In process cost system, fewer requisitions are generally required than in a job order cost system, because the materials are used for processes rather than for specific jobs.
FACTORY LABOR COSTS
As in Job Order System, time tickets may be used in determining the cost of labor assignable to the production department. The entry to assign these costs to the department is:
MANUFACTURING OVERHEAD COSTS
The overhead applied to production department in the same way as in Job Order Cost System. The entry is:
COMPLETION OF A PROCESS
When goods are completed in one process, they are transferred with their cost to the next department. The costs transferred from a prior process are called Transferred-in costs. They are manufacturing costs incurred in another department and transferred to a subsequent department in the manufacturing process. These transferred in costs are treated as raw materials costs in the viewpoint of the receiving department. The following entry is made to record the cost transferred out of the department:
COST OF PRODUCTION REPORT- The cost of production report is the key document used in a process cost system.
STEPS TO PREPARE THE COST OF PRODUCTION REPORT:
1. Calculate the Total Units to Account.
Prepare a quantity schedule (the physical flow units) to determine the total units to be accounted for. These units are then accounted for by the output of the period, which consists of units transferred and units in process at the end of the period. This amount is referred to as the “Total Units as Accounted For”.
*Beginning Inventory in Physical Units...